Saturday, February 07, 2009

Here's What A Harvard Economist Says About The Porkulus Package

And I take it from the Wall Street Journal piece you wrote last week... well, the piece is just specifically about measuring multipliers, but I take it that you are fairly skeptical in general that fiscal policy will boost aggregate demand.

Right. There's a big difference between tax rate changes and things that look just like throwing money at people. Tax rate changes have actual incentive effects. And we have some experience with those actually working.

What would you say is the best empirical evidence there?

Well, you know, it worked to expand GDP for example in '63 and '64 with the Kennedy/Johnson cuts. And then Reagan twice in '81 and '83 and then in '86. And then the Bush 2003 tax-cutting program. Those all worked in the sense of promoting economic growth in a short time frame...

The last thing is just about the stimulus bills as it stands. Two things here. One thing is what do you think about the ratio of spending to tax relief in the bill. And the second is, if you judge it by Larry Summers standard -- that stimulus be temporary, timely and targeted -- does it clear the bar?

This is probably the worst bill that has been put forward since the 1930s. I don't know what to say. I mean it's wasting a tremendous amount of money. It has some simplistic theory that I don't think will work, so I don't think the expenditure stuff is going to have the intended effect. I don't think it will expand the economy. And the tax cutting isn't really geared toward incentives. It's not really geared to lowering tax rates; it's more along the lines of throwing money at people. On both sides I think it's garbage. So in terms of balance between the two it doesn't really matter that much.

It's the worst bill put forward since the 1930s.

Update, 2/8/09: Here are two interesting videos. The first is economist Milton Friedman being interviewed by rabid leftie (but always a polite host) Phil Donahue, and the 2nd is a clip from Saturday Night Live. They're both short; the first is exceedingly enlightening, and the second is funny because it has just enough truth in it to go with the humor.

8 comments:

Conservative Harvard economist Martin Feldstein wrote a nice piece for the Washington Post, arguing that he is in favor of a stimulus package, just not exactly this one. It's worth reading. Mankiw has voiced the same ideas. They would prefer a different package, though they acknowledge that some spending needs to take place on the federal level. There is definitely too much spending for my taste - and a lot in the wrong place. Yet, even conservative economists note that spending is stimulus. The $400 million for new computers at Agriculture is an example. That spending is stimulus. It's a boost to the tech sector, as HP will sell a lot of computers, software companies will support that, and technicians to install and upgrade will be working. Spending is spending. And there's not much sense to arguing about deficits if the Republicans want tax cuts to reduce revenue and, shockingly, 4% mortgages backed by the government. Didn't we just get done trashing FNM/FRE?

Oh, well. I don't buy the hysteria that we're screwed and the economy is going down the tubes. I don't buy it from Obama if they don't pass the stimulus, and I don't buy it from the critics if they do. This isn't 1930 and we aren't Japan. As Carl Sandburg wrote, "The people will live on, the learning blundering people will live on/They shoulder their burden and say/Where to?/What next?"

Sorry Mike, conservative economists - or rather, economists since "conservative" and "liberal" are tags reserved for matters of opinion - note that *some* spending is stimulative and other spending isn't.

If all you're doing is taking a dollar from one person and handing it to another you can reasonably expect the person receiving the dollar to be angry they didn't get two dollars. But you can't reasonably expect any stimulative effect since a dollar in one person's pocket isn't any more stimulative then it is in another person's pocket.

Where tax expenditures like the Trillion Dollar Pork Project start to make some sense is when the spending of one dollar results in the creation of more dollars, the creation of wealth not just the transfer of wealth.

The National Defense Highway network had that sort of stimulative effect by alleviating some of the restrictions of location.

A factory could be sited on inexpensive land within reach of inexpensive labor that was central to the market of the factory. The lowering of costs rationalized the decision to open the factory and wealth was created. But if you'd just handed out the road-building funds to the employees of the factory you'd have had some very happy citizens but not a single dollar's worth of wealth creation.

That's the jist of the beef, or rather the pork, with the bill. That it's not really crafted to fund the sorts of things that'll result in wealth creation but is a massive pork project that takes money from the unworthy and hands it over to those who are sufficiently noble to deserve the funds.

Great clips - especially the Freidman interview. Nearly every American supports the logic of free market capitalism. That's why it continues to thrive here, even through Congressional and White House dominance over the past 150 years. They're liberal, not socialist or communist.

Allen,

I agree as well. Clearly, much of the spending bill is not necessarily stimulus. But that's true of the bank bailout, or tax cuts, as well. Simply putting money in the hands of business doesn't mean they will spend it, or spend it in a manner that is expected.

That's the point made by both Feldstein and Mankiw, as well as you with the example of the highway system. Much of FDR's works programs had the same intention, if not always the same effect. But that's a whole other discussion.

The problems with this economy are problems with an ill-defined line between Wants and Needs. the Oprah mentality, as I like to call, says that everyone deserves the best of everything. My reply is, really? Everyone? Even the guy that sits on his couch all day watching TV? There's a saying "A man's reach must exceed his grasp or what's a heaven for?" In short, you have to put some work effort into place. People who are rich by and large didn't get there by inheriting it. They worked. Most of them still do. Yet the popular image of the Daddy Warbucks image of the wealthy still permeates society. Right now, the Democrats are hellbent on fulfilling all of their socioeconomic dreams in one fell swoop. They aren't seeing the downside of an economy burdened with payback for generations. All they see is the immediate power. And that's the kind of thinking that drove bankers to write loans for people who never intended on paying for their homes. Greed, greed greed all around. It's become the tabloid hallmark of our generation.

I thought you might enjoy an article about second thoughts and voters' remorse.http://www.post-gazette.com/pg/09039/947410-373.stmExcerpt:"Two weeks into the Obama presidency, we like his campaign better than his administration," the Observer said Wednesday. "While some of his appointments are outstanding, others were either badly botched or reflect a half-hearted commitment to the change principle central to his ballot box success."

Most Americans instinctively prefer the free market but are sufficiently attracted to the notion of tipping the scales in their favor by some "reasonable" market restriction, regulation, subsidy or whatever other thumbs on the scale give them some advantage to dispense with the free market pretty casually.

Given some time to consider the situation, free from screaming headlines and imminent if not necessarily credible catastrophes, most Americans will opt for the free market and the reduction of government interference in the market.

> Simply putting money in the hands of business doesn't mean they will spend it, or spend it in a manner that is expected.

Of course they'll spend it. What else does a business do with money? It's not like they'll bury it in a tin box in the onion patch.

Besides, it's not the businesses that'll cause the most damage to the economy via the transfer payments of the Emergency Pork Bill. It's all the social spending crap that the Dems are loading up the bill with. *That* will damage the economy since the utility of so much of social spending is open to question and little to none of it ever throws off the benefits that are used to sell the programs.

The money thrown at education is an obvious waste since the evidence has been mounting for some time that, far from being underfunded, public education is over-funded.

The highway system is one of those examples of unintended consequences in that it was created for the same purpose, and along the lines, of the German autobahn system which was created for military purposes. While there have been significant concessions to political necessity the utility of the highway system for military purposes hasn't changed.